Many car dealerships push consumers into purchasing Prepayment Plans. While these plans can save money, smart consumers can save even more by prepaying their car loans on their own.
Finance charges can make up a large percentage of the cost of new or used cars and trucks. Consumers can save on interest by pre-paying their loan. There are many ways to do this. Simply making the payment earlier than the due date can save significant interest costs. Or, by making a half-payment every two weeks, a consumer can save quite a lot in finance charges - and they can pay-off their account balance months ahead of schedule.
These prepayment strategies work for the majority of car loans, which are structured as "simple interest" loans. That means that interest is calculated by applying the applicable interest rate to the account balance on a daily basis. Payments are applied to the amount of interest that accrued since the date of the previous payment. The balance is applied to reduce the loan amount. If payments are received before the scheduled date, then the amount of interest accrued will be less. That means that more of the payment is used to reduce the amount of the debt - and that will lower the amount of future interest charged on the loan. If payments are consistently made early, a consumer in a typical car loan can save hundreds or even thousands of dollars.
Some car dealerships push consumers into accepting prepayment plans in which money is automatically deducted from their checking accounts by a third-party company. This company will use the funds to pay the loans ahead of the regular payment schedule. While dealerships hype the savings over paying the loan under the original schedule, they often fail to point out that the consumer is typically paying hundreds of dollars in fees for this service. Those charges eat up many of the savings that the consumer would realize if they simply prepaid their loans on their own.
Our advice: Skip the dealership's prepayment plan. Once your account is set up, contact your lender and tell them that you wish to make prepayments. Discuss the manner that you will prepay to make certain that your payments are properly credited. Also, note that some creditors, such as many "Buy Here, Pay Here" dealerships, may not credit you for advance payments. Make certain that you have a "simple interest loan" to confirm that you will save money by making prepayments.
If a dealership is telling you that enrollment in the prepayment plan is required, then it has committed fraud, and you would be wise to contact a lawyer experienced in auto dealer fraud.